Back to GetFilings.com
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
------------------------------
Commission file number 1-16455
RELIANT ENERGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0655566
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1000 Main Street
Houston, Texas 77002
(Address of Principal Executive Offices) (Zip Code)
(713) 497-3000
(Registrant's Telephone Number, Including Area Code)
RELIANT RESOURCES, INC.
(Former Name of Registrant Changed Effective
as of April 26, 2004)
------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of May 3, 2004, the last practicable date for determination, Reliant Energy,
Inc. had 296,358,268 shares of common stock outstanding, excluding 3,445,732
shares held by the Registrant as treasury stock.
================================================================================
RELIANT ENERGY, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, 2003 and 2004.............................................................. 1
Consolidated Balance Sheets (unaudited)
December 31, 2003 and March 31, 2004.................................................................... 2
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2003 and 2004.............................................................. 3
Notes to Unaudited Consolidated Interim Financial Statements............................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 26
Recent Developments and Other Information............................................................... 26
Consolidated Results of Operations...................................................................... 27
Financial Condition..................................................................................... 33
Item 3. Quantitative and Qualitative Disclosures About Non-trading and Trading Activities and Related Market
Risks................................................................................................. 38
Item 4. Controls and Procedures................................................................................. 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 44
Item 6. Exhibits and Reports on Form 8-K........................................................................ 44
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
When we make statements containing projections, estimates or assumptions
about our revenues, income and other financial items, our plans for the future,
future economic performance, transactions for the sale of parts of our
operations and financings related thereto, we are making "forward-looking
statements." Forward-looking statements relate to future events and anticipated
revenues, earnings, business strategies, competitive position or other aspects
of our operations or operating results. In many cases you can identify
forward-looking statements by terminology such as "anticipate," "estimate,"
"believe," "continue," "could," "intend," "may," "plan," "potential," "predict,"
"should," "will," "expect," "objective," "projection," "forecast," "goal,"
"guidance," "outlook," "effort," "target" and other similar words. However, the
absence of these words does not mean that the statements are not
forward-looking. Although we believe that the expectations and the underlying
assumptions reflected in our forward-looking statements are reasonable, there
can be no assurance that these expectations will prove to be correct.
Forward-looking statements are not guarantees of future performance or events.
Such statements involve a number of risks and uncertainties, and actual results
may differ materially from the results discussed in the forward-looking
statements.
Among other things, the matters described in (a) (i) "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in Item 7 and (ii) note 15 to our consolidated financial statements,
each included in our Annual Report on Form 10-K for the year ended December 31,
2003, filed on March 8, 2004 and (b) (i) "Management's Discussion and Analysis
of Financial Condition and Results of Operations", (ii) notes 11 and 12 to our
interim financial statements and (iii) "Legal Proceedings" in Part II, Item 1,
all included in this report, could cause actual results to differ materially
from those expressed or implied in our forward-looking statements.
Each forward-looking statement speaks only as of the date of the
particular statement and we undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future
events or otherwise.
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RELIANT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2004
------------ ------------
REVENUES:
Revenues (including $(6,472) and $783 unrealized (losses) gains) ..... $ 2,541,216 $ 1,732,983
Trading margins ...................................................... (83,683) 2,758
------------ ------------
Total .............................................................. 2,457,533 1,735,741
------------ ------------
EXPENSES:
Fuel and cost of gas sold (including $(7,603) and $12,380 unrealized
(losses) gains) .................................................. 345,468 249,782
Purchased power (including $(1,891) and $8,268 unrealized (losses)
gains) ........................................................... 1,646,565 998,730
Accrual for payment to CenterPoint Energy, Inc. ...................... 46,700 1,658
Operation and maintenance ............................................ 225,221 250,094
Selling and marketing ................................................ 20,048 17,620
Bad debt expense ..................................................... 17,046 8,698
Other general and administrative ..................................... 58,094 54,718
Depreciation ......................................................... 78,223 103,629
Amortization ......................................................... 9,461 13,980
------------ ------------
Total .............................................................. 2,446,826 1,698,909
------------ ------------
OPERATING INCOME ....................................................... 10,707 36,832
------------ ------------
OTHER INCOME (EXPENSE):
Gains (losses) from investments, net ................................. 1,644 (169)
Loss of equity investments ........................................... (1,210) (806)
Loss on sale of receivables .......................................... (3,836) (9,187)
Other, net ........................................................... 802 5,938
Interest expense ..................................................... (97,033) (110,174)
Interest income ...................................................... 14,142 5,139
------------ ------------
Total other expense ................................................ (85,491) (109,259)
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .................... (74,784) (72,427)
Income tax benefit ................................................... (23,001) (26,766)
------------ ------------
LOSS FROM CONTINUING OPERATIONS ........................................ (51,783) (45,661)
------------ ------------
Loss from discontinued operations before income taxes ................ (360,319) -
Income tax expense ................................................... 15,383 -
------------ ------------
Loss from discontinued operations .................................... (375,702) -
------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES .................... (427,485) (45,661)
Cumulative effect of accounting changes, net of tax .................. (24,917) 7,290
------------ ------------
NET LOSS ............................................................... $ (452,402) $ (38,371)
============ ============
BASIC AND DILUTED (LOSS) EARNINGS PER SHARE:
Loss from continuing operations ...................................... $ (0.18) $ (0.15)
Loss from discontinued operations, net of tax ........................ (1.29) -
------------ ------------
Loss before cumulative effect of accounting changes .................. (1.47) (0.15)
Cumulative effect of accounting changes, net of tax .................. (0.08) 0.02
------------ ------------
Net loss ............................................................. $ (1.55) $ (0.13)
============ ============
See Notes to our Unaudited Consolidated Interim Financial Statements
1
RELIANT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 146,524 $ 116,627
Restricted cash .............................................................. 250,748 229,076
Accounts and notes receivable, principally customer, net of allowance of
$74,042 and $43,061 ........................................................ 602,859 458,632
Notes receivable related to receivables facility ............................. 393,822 289,439
Net California receivables subject to refund ................................. 198,609 -
Inventory .................................................................... 268,701 242,431
Trading and derivative assets ................................................ 493,046 602,179
Margin deposits on energy trading and hedging activities ..................... 77,271 153,054
Prepayments and other current assets ......................................... 257,690 253,801
---------------- ----------------
Total current assets ..................................................... 2,689,270 2,345,239
---------------- ----------------
Property, plant and equipment, gross ........................................... 9,251,118 9,304,831
Accumulated depreciation ....................................................... (724,334) (812,804)
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET ............................................. 8,526,784 8,492,027
---------------- ----------------
OTHER ASSETS:
Goodwill, net ................................................................ 482,534 482,534
Other intangibles, net ....................................................... 719,469 747,948
Net California receivables subject to refund ................................. - 217,000
Equity investments ........................................................... 95,223 92,747
Trading and derivative assets ................................................ 199,716 228,793
Prepaid lease ................................................................ 217,781 229,033
Restricted cash .............................................................. 36,916 36,916
Other ........................................................................ 340,566 332,134
---------------- ----------------
Total other assets ....................................................... 2,092,205 2,367,105
---------------- ----------------
TOTAL ASSETS ................................................................... $ 13,308,259 $ 13,204,371
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and short-term borrowings .................. $ 430,685 $ 401,240
Accounts payable, principally trade .......................................... 516,843 505,316
Trading and derivative liabilities ........................................... 357,219 362,115
Margin deposits from customers on energy trading and hedging activities ...... 36,136 35,856
Retail customer deposits ..................................................... 57,279 61,817
Accrual for payment to CenterPoint Energy, Inc. .............................. 175,000 176,658
Other ........................................................................ 425,247 364,903
---------------- ----------------
Total current liabilities ................................................ 1,998,409 1,907,905
---------------- ----------------
OTHER LIABILITIES:
Accumulated deferred income taxes ............................................ 524,701 487,480
Trading and derivative liabilities ........................................... 216,399 288,618
Benefit obligations .......................................................... 133,664 130,894
Other ........................................................................ 354,176 355,262
---------------- ----------------
Total other liabilities .................................................. 1,228,940 1,262,254
---------------- ----------------
LONG-TERM DEBT ................................................................. 5,709,111 5,659,798
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; par value $0.001 per share (125,000,000 shares authorized;
none outstanding) .......................................................... - -
Common stock; par value $0.001 per share (2,000,000,000 shares authorized;
299,804,000 issued) ........................................................ 61 61
Additional paid-in capital ................................................... 5,841,438 5,830,628
Treasury stock at cost, 5,212,017 and 4,153,496 shares ....................... (89,769) (71,537)
Retained deficit ............................................................. (1,338,578) (1,376,949)
Accumulated other comprehensive loss ......................................... (41,353) (7,789)
---------------- ----------------
Stockholders' equity ..................................................... 4,371,799 4,374,414
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 13,308,259 $ 13,204,371
================ ================
See Notes to our Unaudited Consolidated Interim Financial Statements
2
RELIANT ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................... $ (452,402) $ (38,371)
Loss from discontinued operations .......................................................... 375,702 -
------------ ------------
Net loss from continuing operations and cumulative effect of
accounting changes ....................................................................... (76,700) (38,371)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Cumulative effect of accounting changes .................................................. 24,917 (7,290)
Depreciation and amortization ............................................................ 87,684 117,609
Deferred income taxes .................................................................... (55,936) (22,681)
Net unrealized gains on trading energy derivatives ....................................... (91,739) (4,942)
Net unrealized losses (gains) on non-trading energy derivatives .......................... 15,966 (21,431)
Accrual for payment to CenterPoint Energy, Inc. .......................................... 46,700 1,658
Other, net ............................................................................... 1,189 27,405
Changes in other assets and liabilities:
Restricted cash ........................................................................ (115,782) 21,672
Accounts and notes receivable and unbilled revenue, net ................................ 6,179 82,776
Notes receivable facility payments/proceeds, net ....................................... (11,000) 46,000
Inventory .............................................................................. 48,475 26,882
Margin deposits on energy trading and hedging activities, net .......................... 4,881 (76,063)
Net non-trading derivative assets and liabilities ...................................... (12,221) 262
Prepaid lease obligation ............................................................... (12,221) (11,252)
Other current assets ................................................................... (61,941) (26,873)
Other assets ........................................................................... (39,282) (42,893)
Accounts payable ....................................................................... (15,951) (11,739)
Taxes payable/receivable ............................................................... 96,035 78,249
Other current liabilities .............................................................. (22,994) (47,190)
Other liabilities ...................................................................... (48,641) 3,818
------------ ------------
Net cash (used in) provided by continuing operations from operating activities ....... (232,382) 95,606
Net cash provided by discontinued operations from operating activities ............... 5,260 -
------------ ------------
Net cash (used in) provided by operating activities .................................. (227,122) 95,606
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................................................... (188,910) (70,258)
Other, net ................................................................................. 481 2,100
------------ ------------
Net cash used in continuing operations from investing activities ..................... (188,429) (68,158)
Net cash used in discontinued operations from investing activities ................... (1,477) -
------------ ------------
Net cash used in investing activities ................................................ (189,906) (68,158)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ............................................................... 94,902 -
Payments of long-term debt ................................................................. (11,635) (49,149)
Decrease in short-term borrowings and revolving credit facilities, net ..................... (267,615) (25,050)
Payments of financing costs ................................................................ (130,774) (233)
Other, net ................................................................................. 1,912 17,087
------------ ------------
Net cash used in continuing operations from financing activities ..................... (313,210) (57,345)
Net cash used in discontinued operations from financing activities ................... (402) -
------------ ------------
Net cash used in financing activities ................................................ (313,612) (57,345)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ................................. 4,218 -
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................................................... (726,422) (29,897)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 1,114,850 146,524
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................... $ 388,428 $ 116,627
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Payments:
Interest paid (net of amounts capitalized) for continuing operations ..................... $ 113,662 $ 142,049
Income taxes paid (net of income tax refunds received) for continuing operations ......... $ (55,186) $ (88,809)
See Notes to our Unaudited Consolidated Interim Financial Statements
3
RELIANT ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(1) BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
In March 2004, the board of directors of Reliant Resources, Inc. approved
changing the name of the company from Reliant Resources, Inc. to Reliant Energy,
Inc. The name change became effective on April 26, 2004. The ticker symbol for
our common stock remains the same (NYSE: RRI). As used in this Form 10-Q,
"Reliant Energy" refers to Reliant Energy, Inc. and "we," "us" and "our" refer
to Reliant Energy, Inc. and its consolidated subsidiaries.
Our business operations provide electricity and related services to retail
customers primarily in Texas (including acquiring and managing the related
supply) and generate and sell electricity and other related services in
wholesale energy markets in various regions of the United States. For
information regarding our current reportable segments, see note 15. As part of
our efforts to simplify the corporate structure, we are evaluating a possible
change in our reportable segments.
This Form 10-Q includes our consolidated interim financial statements and
notes (interim financial statements). The interim financial statements are
unaudited, omit certain financial statement disclosures and should be read in
conjunction with our audited consolidated financial statements and notes
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
BASIS OF PRESENTATION
Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Adjustments and Reclassifications. The interim financial statements
reflect all normal recurring adjustments necessary, in management's opinion to
present fairly our financial position and results of operations for the reported
periods. Amounts reported for interim periods, however, may not be indicative of
a full year period due to seasonal fluctuations in demand for energy and energy
services, changes in energy commodity prices, timing of maintenance and other
expenditures, dispositions, changes in interest expense and other factors.
We have reclassified certain amounts reported in this Form 10-Q from prior
periods to conform to the 2004 presentation of financial statements. These
reclassifications had no impact on reported earnings.
We have reclassified general and administrative expenses and operation and
maintenance expenses from prior period's presentation. Other general and
administrative expenses in the consolidated statements of operations include (a)
corporate and administrative services (including management services, financial
and accounting, cash management and treasury support, legal, information
technology system support, communications, office management and human
resources), (b) regulatory costs and (c) certain benefit costs.
FIN No. 46R. In January 2004, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 46 (revised December 2003) "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN No. 46R),
which replaces the original FIN No. 46 and modified certain criteria in
determining which entities should be considered as variable interest entities.
The adoption had no impact on our financial statements. The application of FIN
No. 46R continues to evolve as the FASB continues to address issues submitted
for consideration. We will continue to assess our application of clarified or
revised guidance related to FIN No. 46R.
Changes in Estimates for Retail Energy Sales and Costs. As of December 31,
2003 and March 31, 2004, we recorded unbilled revenues of $290 million and $277
million, respectively, for retail energy sales. These revenues and the related
energy supply costs are based on (a) our estimates of customer usage and (b)
initial usage information provided by the Electric Reliability Council of Texas
(ERCOT) Independent System Operator (ISO) relating to customer meter reading
data provided by third parties. Upon receipt of actual or updated usage data
from
4
the ERCOT ISO, we revise the estimates and record any resulting changes in the
period when the information becomes available.
During the three months ended March 31, 2003 and 2004, we recognized in
gross margin $15 million of income and $9 million of expense, respectively,
resulting from revisions to prior period estimates related to ERCOT usage.
EITF No. 03-11. Prior to October 1, 2003, we generally recorded revenues,
fuel and cost of gas sold, and purchased power related to sale and purchase
contracts designated as hedges on a gross basis in the delivery period.
Thereafter, we began to record certain transactions on a net basis, including
the settlement of sales and purchases of fuel and purchased power related to our
non-trading energy derivative activities that were not physically delivered. The
change in accounting treatment resulted in a $434 million decrease in revenues
and a corresponding $434 million decrease in fuel and cost of gas sold and
purchased power for the three months ended March 31, 2004. We believe the
application of EITF No. 03-11 will continue to result in a significant amount of
our non-trading energy derivative activities being reported on a net basis
prospectively that were previously reported on a gross basis. Emerging Issues
Task Force (EITF) Issue No. 03-11, "Reporting Realized Gains and Losses on
Derivative Instruments That Are Subject to FASB Statement No. 133 and Not "Held
for Trading Purposes" As Defined in EITF Issue No. 02-03" (EITF No. 03-11) has
no impact on margins or net income. Reclassification of prior period amounts is
not required. It is not practicable for us to determine sales and purchases of
fuel and purchased power for the three months ended March 31, 2003 that would
have been shown net if EITF No. 03-11 had been applied to our results of
operations historically.
(2) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Prior to January 1, 2004, we recognized repair and maintenance costs for
power generation assets acquired prior to December 31, 1999, under the
"accrue-in-advance" method. Under the accrue-in-advance method, we estimated the
costs of planned major maintenance and accrued the related expense over the
maintenance cycle, which ranges from two to 12 years. Effective January 1, 2004,
we began expensing these costs as incurred. Such change conforms our accounting
for all major maintenance costs to a method that we believe is preferable in the
circumstances. As a result of this change in accounting method, we (a)
recognized a cumulative effect of an accounting change of $7 million, net of tax
of $3 million, (or $0.02 per diluted share), (b) decreased long-term liabilities
by $10 million and (c) decreased deferred tax assets by $3 million.
(3) STOCK-BASED COMPENSATION PLANS AND RETIREMENT PLANS
(a) STOCK-BASED COMPENSATION PLANS.
We currently apply the intrinsic value method of accounting for employee
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25).
We disclose the pro forma effect on net income (loss) and per share
amounts as if the fair value (determined using the Black-Scholes model) method
of accounting had been applied to all stock awards. In March 2004, the FASB
issued a proposed statement that would eliminate the ability to account for
share-based compensation transactions using APB No. 25 and would generally
require that such transactions be accounted for using a fair value based method.
The final statement is expected to be issued in the fourth quarter of 2004 and
is expected to be effective for us beginning January 1, 2005.
If employee stock-based compensation costs had been expensed based on the
fair value method, our net loss and per share amounts would have approximated
the following pro forma results for the three months ended March 31, 2003 and
2004:
5
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2004
----------------- -----------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net loss, as reported .................................................. $ (452) $ (38)
Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effects ..................... 1 1
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects ................................... (9) (6)
----------------- -----------------
Pro forma net loss ..................................................... $ (460) $ (43)
================= =================
Loss per share:
Basic and diluted, as reported ....................................... $ (1.55) $ (0.13)
================= =================
Basic and diluted, pro forma ......................................... $ (1.58) $ (0.15)
================= =================
Prior to February 2004, our stock options granted to employees have all
been granted with exercise prices equal to or greater than market values at date
of grant and vesting was not contingent on achieving performance metrics. The
typical vesting schedule for these options is three years. We have recognized no
compensation expense under APB No. 25 for such grants.
In February 2004, the compensation committee of our board of directors
granted performance awards to 26 of our key employees under a Key Employee Award
Program (Key Employee Program) established under the Reliant Resources, Inc.
2002 Long-Term Incentive Plan (LTIP). The Key Employee Program is intended to
provide incentives to the group of key executives and other officers expected to
be significant contributors to the achievement of our three-year strategic plan.
Under the Key Employee Program, participants received an aggregate of 93 award
units ranging from a minimum of one to a maximum of 16 units per participant.
Each unit consisted of the following targeted awards: (a) 68,000 stock options
(exercise price of $8.135 per share), (b) 16,000 shares of performance vesting
restricted stock and (c) 16,000 cash performance units (convertible into a cash
amount equal to the market value of one share of our common stock on the date of
vesting). Participants in the Key Employee Program are not eligible to receive
additional LTIP grants until after December 31, 2006. Awards granted under the
Key Employee Program are forfeited if the participant ceases for any reason to
be an employee of Reliant Energy or its consolidated subsidiaries before the
award vests. Upon a change of control (as defined under the LTIP), performance
units will vest immediately at the maximum payout amount of 140% of the targeted
award.
No awards will be vested under the Key Employee Program unless we meet
specified qualitative and quantitative performance goals. The quantitative goals
entail achieving an adjusted debt to adjusted EBITDA (earnings before interest,
income taxes, depreciation and amortization and other items, as defined in the
Key Employee Program documents) ratio of no more than 3.5 as of December 31,
2006, subject to the compensation committee's discretion based on market
conditions and a review of other financial metrics. The qualitative goals
include (a) delivering superior customer value and (b) building a great company
for which to work. The amount of payout (60% to 140% of the targeted award) will
depend on our level of achievement of the performance goals as determined in the
discretion of the compensation committee of our board of directors and any other
factors it considers relevant.
The units awarded under the Key Employee Program are being accounted for
using variable plan accounting with related compensation cost recorded in the
statement of operations over the three-year vesting period.
In addition, during March 2004, the compensation committee of our board of
directors granted 588,000 time-based vesting restricted share units of our
common stock to other employees. These restricted share units will vest at the
end of a three-year period.
6
(b) RETIREMENT PLANS.
Net benefit cost for our qualified retirement plans includes the following
components:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- -------------------------
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
(IN MILLIONS)
Service cost ...................... $ 2.0 $ 2.2 $ 0.8 $ 0.8
Interest cost ..................... 1.2 1.4 1.0 1.1
Expected return on plan assets .... (0.7) (1.0) - -
Accounting settlement charge ...... 0.3 - - -
Net amortization .................. 0.3 0.4 0.3 0.4
---------- ---------- ---------- ----------
Net benefit cost .............. $ 3.1 $ 3.0 $ 2.1 $ 2.3
========== ========== ========== ==========
Pension expense associated with our non-qualified pension plan was $0 and
$2 million during the three months ended March 31, 2003 and 2004, respectively.
During the three months ended March 31, 2004, we recognized an accounting
settlement charge of $2 million (pre-tax) related to distributions paid.
We expect cash contributions to our pension plans will be approximately
$12 million during 2004. As of March 31, 2004, we had contributed $4 million.
(4) COMPREHENSIVE INCOME (LOSS)
The following table summarizes the components of total comprehensive
income (loss):
THREE MONTHS
ENDED MARCH 31,
------------ ------------
2003 2004
------------ ------------
(IN MILLIONS)
Net loss ................................................................. $ (452) $ (38)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ............................... (6) -
Deferred gain from cash flow hedges .................................... 36 28
Reclassification of net deferred loss from cash flow hedges realized
in net loss .......................................................... 6 5
Unrealized loss on available-for-sale securities ....................... (1) -
Comprehensive loss resulting from discontinued operations .............. (39) -
------------ ------------
Comprehensive loss ....................................................... $ (456) $ (5)
============ ============
(5) GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
We evaluate goodwill and property, plant and equipment annually and when
events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable. We performed our annual impairment analysis of
our goodwill as of November 1, 2003 and recorded no impairments at that time. We
performed impairment analyses of all of our wholesale energy reporting unit's
property, plant and equipment as of July 2003 and performed subsequent
impairment analyses of certain of our wholesale energy reporting unit's
property, plant and equipment as of December 31, 2003. In conjunction with those
tests, we recorded no impairments. During the three months ended March 31, 2004,
we recognized $12 million in accelerated depreciation expense related to early
retirements of certain property, plant and equipment.
If our wholesale energy market outlook changes negatively, we could have
impairments of property, plant and equipment and goodwill in future periods. In
addition, our ongoing evaluation of our wholesale energy business could result
in decisions to mothball, retire or dispose of additional generation assets, any
of which could result in impairment charges of goodwill or property, plant and
equipment or impact our fixed assets' depreciable lives.
In addition, as we continue to evaluate our business operations and to
simplify the corporate structure, we could have write-offs and impacts on
depreciable lives of other types of property, plant and equipment, such as
information technology systems. We are currently evaluating the future use of
certain information technology systems, which have a net book value of
approximately $127 million as March 31, 2004.
7
See note 12 for discussion of possible impairment of a subsidiary's
generation assets.
(6) DERIVATIVE INSTRUMENTS, INCLUDING ENERGY TRADING ACTIVITIES
Trading and derivative assets and liabilities at December 31, 2003 and
March 31, 2004 include amounts for non-trading and trading activities, as
follows:
ASSETS LIABILITIES
------------------------ ------------------------ NET ASSETS
CURRENT LONG-TERM CURRENT LONG-TERM (LIABILITIES)
---------- ---------- ---------- ---------- ------------
(IN MILLIONS)
DECEMBER 31, 2003:
Non-trading activities:
Cash flow hedges - offset to accumulated
other comprehensive income (loss):
Commodity ...................................... $ 828 $ 284 $ (668) $ (304) $ 140
Interest ....................................... - 3 (26) (22) (45)
---------- ---------- ---------- ---------- ----------
Total ........................................ 828 287 (694) (326) 95
Derivatives marked to market through earnings .... 404 58 (383) (53) 26
---------- ---------- ---------- ---------- ----------
Total ........................................ 1,232 345 (1,077) (379) 121
Trading activities ................................. 1,094 529 (1,113) (511) (1)
Set-off adjustments ................................ (1,833) (674) 1,833 674 -
---------- ---------- ---------- ---------- ----------
Total ........................................ $ 493 $ 200 $ (357) $ (216) $ 120
========== ========== ========== ========== ==========
MARCH 31, 2004:
Non-trading activities:
Cash flow hedges - offset to accumulated
other comprehensive income (loss):
Commodity ...................................... $ 1,143 $ 392 $ (865) $ (430) $ 240
Interest ....................................... - 1 (27) (27) (53)
---------- ---------- ---------- ---------- ----------
Total ........................................ 1,143 393 (892) (457) 187
Derivatives marked to market through earnings .... 569 64 (555) (83) (5)
---------- ---------- ---------- ---------- ----------
Total ........................................ 1,712 457 (1,447) (540) 182
Trading activities ................................. 1,123 574 (1,148) (551) (2)
Set-off adjustments ................................ (2,233) (802) 2,233 802 -
---------- ---------- ---------- ---------- ----------
Total ........................................ $ 602 $ 229 $ (362) $ (289) $ 180
========== ========== ========== ========== ==========
(a) NON-TRADING DERIVATIVE ACTIVITIES.
Pre-tax income (loss) of our non-trading derivative instruments, including
non-trading energy derivatives and interest rate derivatives, both from cash
flow hedge ineffectiveness and from non-trading derivative mark-to-market income
and losses, for the three months ended March 31, 2003 and 2004 are as follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(IN MILLIONS)
Non-trading energy derivative instruments:
Hedge ineffectiveness (1) .......................................... $ (12) $ -
Other net unrealized (losses) gains (2) ............................ (4) 21
Interest rate derivative instruments:
Hedge ineffectiveness (1) .......................................... (2) -
Other net unrealized losses (2) .................................... - (7)
------------ ------------
Total ............................................................ $ (18) $ 14
============ ============
- ----------------
(1) For the three months ended March 31, 2003 and 2004, no component of the
derivative instruments' gain or loss was excluded from the assessment of
effectiveness.
(2) Includes $0 for the three months ended March 31, 2003 and 2004, of
income/losses recognized in our results of operations as a result of the
discontinuance of cash flow hedges because it was probable that the
forecasted transaction would not occur.
8
As of December 31, 2003 and March 31, 2004, the maximum length of time we
are hedging our exposure to the variability in future cash flows for forecasted
transactions, excluding the payment of variable interest on existing financial
instruments, is nine years and eight years, respectively. As of December 31,
2003 and March 31, 2004, the maximum length of time we are hedging our exposure
to the payment of variable interest rates is six years. As of March 31, 2004, we
expect $75 million of gains netted in accumulated other comprehensive loss to be
reclassified into net income (loss) during the period from April 1, 2004 to
March 31, 2005.
(b) ENERGY TRADING ACTIVITIES.
In March 2003, we discontinued our proprietary trading business. Trading
positions taken prior to our decision to exit this business are managed solely
for purposes of closing them on acceptable terms.
During the three months ended March 31, 2003 and 2004, we recognized $92
million and $5 million in unrealized gains, which are included in trading
margins in our consolidated statements of operations. During the three months
ended March 31, 2003 and 2004, we did not recognize any income/loss for changes
in the fair values of trading assets/liabilities due to changes in valuation
techniques and assumptions.
9
(7) CREDIT FACILITIES AND DEBT
The following table sets forth our debt outstanding to third parties as of
December 31, 2003 and March 31, 2004:
DECEMBER 31, 2003 MARCH 31, 2004
--------------------------------- -----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CONTRACTUAL CONTRACTUAL
INTEREST INTEREST
RATE(1) LONG-TERM CURRENT(2) RATE(1) LONG-TERM CURRENT(2)
---------- --------- ---------- ----------- --------- ----------
(IN MILLIONS, EXCEPT INTEREST RATES)
BANKING OR CREDIT FACILITIES, BONDS AND NOTES
Reliant Energy:
Senior secured term loans ......................... 5.27% $ 1,785 $ - 5.33% $ 1,785 $ -
Senior secured revolver ........................... 5.58 183 - 6.69 155 -
Senior secured notes - 2010 ....................... 9.25 550 - 9.25 550 -
Senior secured notes - 2013 ....................... 9.50 550 - 9.50 550 -
Convertible senior subordinated notes ............. 5.00 275 - 5.00 275 -
Orion Power Holdings and Subsidiaries:
Orion Power Holdings senior notes ................. 12.00 400 - 12.00 400 -
Orion MidWest and Orion NY term loans ............. 3.93 1,093 125 3.94 1,085 93
Orion MidWest revolving working capital
facility ........................................ - - - - - -
Orion NY revolving working capital
facility ........................................ - - - - - -
Liberty credit agreement:
Floating rate debt (3) .......................... 2.40 - 97 2.37 - 97
Fixed rate debt (3) ............................. 9.02 - 165 9.02 - 165
PEDFA bonds for Seward plant ........................ 1.27 400 - 1.09 400 -
REMA term loans ..................................... 4.19 28 14 4.22 21 14
Reliant Energy Channelview, L.P.:
Term loans and revolving working capital
facility:
Floating rate debt .............................. 2.54 283 7 2.50 281 11
Fixed rate debt ................................. 9.55 75 - 9.55 75 -
--------- ---------- ---------- ---------
Total facilities, bonds and notes .............. 5,622 408 5,577 380
--------- ---------- ---------- ---------
OTHER
Adjustment to fair value of debt (4) ................ - 58 8 - 56 8
Adjustment to fair value of interest rate swaps (4).. - 34 13 - 31 12
Adjustment to fair value of debt due to warrants .... - (6) (2) - (5) (2)
Other ............................................... 5.41-6.20 1 4 5.41-6.20 1 3
--------- ---------- ---------- ---------
Total other debt ............................... 87 23 83 21
--------- ---------- ----------- ---------
Total debt ................................... $ 5,709 $ 431 $ 5,660 $ 401
========= ========== ========== =========
- ---------------------
(1) The weighted average contractual interest rates are for borrowings
outstanding as of December 31, 2003 or March 31, 2004, as applicable.
(2) Includes amounts due within one year of the date noted and loans outstanding
under revolving and working capital facilities classified as current
liabilities. See sub-footnote 3 below.
(3) The entire balance outstanding under this credit agreement has been
classified as current as of December 31, 2003 and March 31, 2004. Included
in the outstanding amount as of December 31, 2003 and March 31, 2004, is $2
million and $4 million, respectively, of scheduled principal payments, for
which no payment has been made. The scheduled principal payments totaled $2
million in each of October 2003 and January 2004. In addition, no payment
has been made for the $2 million principal payment scheduled for April 2004.
As interest payments due were deferred, additional interest will be charged
on the past due interest amounts. Of the amount shown as current under the
Liberty credit agreement, $9 million matures within 12 months of March 31,
2004. See note 12 for further discussion.
(4) Debt and interest rate swaps acquired in the Orion Power acquisition were
adjusted to fair market value as of the acquisition date. "Orion Power"
refers to Orion Power Holdings, Inc. (Orion Power Holdings) and its
subsidiaries, unless we specify or the context indicates otherwise. Included
in the adjustment to fair value of debt is $66 million and $64 million
related to the Orion Power Holdings senior notes as of December 31, 2003 and
March 31, 2004, respectively. Included in the adjustment to fair value of
interest rate swaps is $28 million and $19 million related to the Orion
Power MidWest, L.P. (Orion MidWest) and Orion Power New York, L.P. (Orion
NY) credit facilities, respectively, as of December 31, 2003. Included in
the adjustment to fair value of interest rate swaps is $26 million and $17
million related to the Orion MidWest and Orion NY credit facilities,
respectively, as of March 31, 2004. Included in interest expense is
amortization of $2 million and $2 million for valuation adjustments for debt
and $7 million and $4 million for valuation adjustments for interest rate
swaps, respectively, for the three months ended March 31, 2003 and 2004,
respectively. These valuation adjustments are being amortized over the
respective remaining terms of the related financial instruments.
10
The following table provides a summary of the amounts owed and amounts
available as of March 31, 2004, under our various committed credit facilities,
bonds and notes:
TOTAL COMMITMENTS
COMMITTED DRAWN LETTERS OF UNUSED EXPIRING BY PRINCIPAL AMORTIZATION AND
CREDIT AMOUNT CREDIT AMOUNT MARCH 31, 2005 COMMITMENT EXPIRATION DATE
--------- ------- ------------- --------- -------------- --------------------------
(IN MILLIONS)
Reliant Energy:
Senior secured term loans...... $ 1,785 $ 1,785 $ - $ - $ - March 2007
Senior secured revolver........ 2,100 155 1,010(1) 935 - March 2007
Senior secured notes - 2010.... 550 550 - - - July 2010
Senior secured notes - 2013.... 550 550 - - - July 2013
Convertible senior
subordinated notes........... 275 275 - - - August 2010
Orion Power Holdings and
Subsidiaries:
Orion Power Holdings senior
notes........................ 400 400 - - - May 2010
Orion MidWest and Orion NY
term loans................... 1,178 1,178 - - 28 June 2004 - October 2005
Orion MidWest revolving
working capital facility..... 75 - 13 62 - October 2005
Orion NY revolving working
capital facility............. 30 - 7 23 - October 2005
Liberty credit agreement....... 284 262 17 5(2) 9 April 2004 - April 2026
PEDFA bonds for Seward plant..... 400 400 - - - December 2036
REMA term loans.................. 35 35 - - 14 July 2004 - July 2006
Reliant Energy Channelview, LP:
Term loans and revolving
working capital facility..... 377 367 - 10 7 April 2004 - July 2024
--------- ------- ----------- --------- --------------
Total..................... $ 8,039 $ 5,957 $ 1,047 $ 1,035 $ 58
========= ======= =========== ========= ==============
- ------------
(1) Included in this amount is $407 million of letters of credit outstanding
that support the $400 million of Pennsylvania Economic Development
Financing Authority (PEDFA) bonds related to the Seward plant.
(2) This amount is currently not available to Liberty Electric PA, LLC and
Liberty Electric Power, LLC. See note 12.
As of March 31, 2004, committed credit facilities and notes aggregating
$710 million were unsecured.
(8) STOCKHOLDERS' EQUITY
(a) COMMON STOCK ACTIVITY.
The following table describes our common stock activity for the indicated
periods:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Shares of common stock outstanding, net of treasury
stock, beginning of period ........................................... 290,605 294,592
Shares issued to employees under our employee stock
purchase plan ........................................................ 718 764
Shares issued to our savings plans ..................................... 726 5
Shares issued under our long-term incentive plans ...................... 83 290
------------ ------------
Shares of common stock outstanding, net of treasury
stock, end of period ................................................. 292,132 295,651
============ ============
11
(b) TREASURY STOCK ISSUANCES AND TRANSFERS.
The following table describes the changes in the number of shares of our
treasury stock for the indicated periods:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Shares of treasury stock, beginning of period .......................... 9,199 5,212
Shares of treasury stock issued to employees under our
employee stock purchase plan ......................................... (718) (764)
Shares of treasury stock issued to our savings plans ................... (726) (5)
Shares of treasury stock issued under our long-term
incentive plans ...................................................... (83) (290)
------------ ------------
Shares of treasury stock, end of period ................................ 7,672 4,153
============ ============
(c) EQUITY CONTRIBUTIONS.
During the three months ended March 31, 2003, CenterPoint Energy, Inc. and
its consolidated subsidiaries (CenterPoint) made equity contributions to us of
$45 million. The contributions in 2003 primarily related to the non-cash
conversion to equity of accounts payable to CenterPoint.
(9) EARNINGS PER SHARE
The following table presents our basic and diluted weighted average shares
outstanding:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Diluted Weighted Average Shares Calculation:
Weighted average shares outstanding .................................... 291,438 296,067
Plus: Incremental shares from assumed conversions:
Stock options ...................................................... - -
Restricted stock and performance-based shares ...................... - -
Employee stock purchase plan ....................................... - -
5.00% convertible senior subordinated notes ........................ - -
Warrants ........................................................... - -
------------ ------------
Weighted average shares assuming dilution ............................ 291,438 296,067
============ ============
For the three months ended March 31, 2003 and 2004, as we incurred a loss
from continuing operations, no potentially dilutive shares are included in the
computation of diluted EPS as such shares would be anti-dilutive. The
computation of diluted EPS excludes incremental shares in the following amounts
from assumed conversions:
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2004
------------ ------------
(SHARES IN THOUSANDS)
Stock options .......................................................... 38(1) 1,619(2)
============ ============
Restricted stock and performance-based shares .......................... 894 1,431
============ ============
Employee stock purchase plan ........................................... 174 41
============ ============
5.00% convertible senior subordinated notes (3) ........................ - 28,823(4)
============ ============
Warrants ............................................................... - 2,681
============ ============
- -----------------
(1) For the three months ended March 31, 2003, the incremental shares from
assumed conversions exclude purchase options for 18,617,447 shares of
common stock that have an exercise price (ranging from $4.01 to $34.03 per
share) greater than or equal to the average market price ($3.97 per share)
and would thus be anti-dilutive if exercised.
(2) For the three months ended March 31, 2004, the incremental shares from
assumed conversions exclude purchase options for 13,362,313 shares of
common stock that have an exercise price (ranging from $7.74 to $34.03 per
share) greater than or equal to the average market price ($7.73 per share)
and would thus be anti-dilutive if exercised.
(3) These notes were issued in June and July 2003.
12
(4) If we had recorded income from continuing operations for the three months
ended March 31, 2004, for purposes of calculating diluted EPS, we would
have increased our income from continuing operations by $2 million as it
relates to the assumed conversions for our convertible senior subordinated
notes.
(10) COMMITMENTS
(a) PAYMENT TO CENTERPOINT IN 2004.
Under the Texas electric restructuring law, we will be required to make a
payment to CenterPoint estimated to be due in the third quarter of 2004 related
to residential customers. We recognized $128 million (pre-tax) in the third and
fourth quarters of 2002, $47 million (pre-tax) in the first quarter of 2003 and
$2 million (pre-tax) in the first quarter of 2004 for a total accrual and
estimated payment of $177 million as of March 31, 2004.
(b) GUARANTEES.
We have guaranteed, in the event CenterPoint becomes insolvent, certain
non-qualified benefits of CenterPoint's existing retirees at September 20, 2002.
The estimated maximum potential amount of future payments under this guarantee
was approximately $57 million and $60 million as of December 31, 2003 and March
31, 2004, respectively. There are no assets held as collateral. We have recorded
no liability in our consolidated balance sheet as of December 31, 2003 or March
31, 2004 for this guarantee. We believe the likelihood that we would be required
to perform or otherwise incur any significant losses associated with this
guarantee is remote.
We routinely enter into contracts that include indemnification and
guarantee provisions. Examples of these contracts include purchase and sale
agreements, commodity purchase and sale agreements, operating agreements,
service agreements, lease agreements, procurement agreements and certain debt
agreements. In general, these provisions indemnify the counterparty for matters
such as breaches of representations and warranties and covenants contained in
the contract and/or against certain specified liabilities. In the case of
commodity purchase and sale agreements, generally damages are limited through
liquidated damages clauses whereby the parties agree to establish damages as the
costs of covering any breached performance obligations. In the case of debt
agreements, we generally indemnify against liabilities that arise from the
preparation, entry into, administration or enforcement of the agreement. We are
unable to estimate our maximum potential amount under these provisions unless
and until an event triggering payment under these provisions occurs. However,
based on current information, we consider the likelihood of making any material
payments under these provisions to be remote.
(11) CONTINGENCIES
(a) LEGAL AND ENVIRONMENTAL MATTERS.
For information regarding legal proceedings and environmental matters, see
note 15 to our consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2003, which, as updated herein, is
incorporated by reference.
Indictment of Reliant Energy Services, Inc. On April 8, 2004, we were
notified that a federal grand jury in San Francisco, California had returned an
indictment against one of our subsidiaries, Reliant Energy Services, Inc.
(Reliant Energy Services), as well as two former and two current employees of
Reliant Energy Services, on charges related to an alleged violation of the
Commodity Exchange Act and related wire fraud and conspiracy charges. The
indictment is based on allegations that Reliant Energy Services engaged in price
manipulation by curtailing electricity generation in California on two days in
June 2000. Reliant Energy Services is the subsidiary of Reliant Energy
responsible for purchasing fuel for and marketing the power produced by our
generation facilities and acquiring some of our retail electric supply. We
believe the actions that are the subject of the indictment were not in violation
of laws, tariffs or regulations in effect at the time. We intend to contest
these charges vigorously. We do not believe that this action will have any
material adverse impact on our results of operations, financial position and
cash flows. In addition, we do not believe that this proceeding will have any
material adverse impact on our ongoing business operations, including any impact
on credit or debt agreements; the wholesale license held by our operating
subsidiary, Reliant Energy Services; the retail and wholesale licenses held by
other subsidiaries; or contracts and agreements to which Reliant Energy Services
is a party.
Shareholder Derivative Actions. In April 2004, a Texas Court granted
13
a motion for summary judgment dismissing the previously disclosed shareholder
derivative lawsuit filed against our directors and independent auditors in the
269th Judicial District, Harris County, Texas.
(b) CALIFORNIA ENERGY SALES CREDIT AND REFUND PROVISIONS.
We have recorded receivables from the California Independent System
Operator (Cal ISO) and the California Power Exchange (Cal PX) relating to power
sales into the markets run by the Cal ISO and the Cal PX. The receivables relate
to the period between the fourth quarter of 2000 and June 2001. For additional
information, see note 15(b) to our consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2003.
We are a party to a refund proceeding initiated by the Federal Energy
Regulatory Commission (FERC) in 2001 regarding wholesale electricity prices that
we charged in California from October 2, 2000 through June 20, 2001. Based on
the most recent refund methodology adopted by the FERC with respect to these
receivables, we currently estimate our refund obligation to be $81 million.
However, the estimated reasonably possible range of refunds, depending on
possible interpretations of the FERC's order, varies from $81 million to $210
million for the designated energy sales in California.
We have adjusted these receivables to take into account (a) the expected
refund obligation, (b) a credit reserve (as of December 31, 2003) and (c)
interest accrued on the receivables. The adjustments are as follows:
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(IN MILLIONS)
Accounts receivable related to the period from October 2000 through
June 2001, excluding estimated refund obligation...................... $ 283 $ 279
Estimated refund obligation............................................. (81) (81)(1)
Credit reserve.......................................................... (21) -
Interest receivable..................................................... 18 19
----------------- --------------
Accounts receivable, net.............................................. $ 199 $ 217
================= ==============
- -----------------
(1) We will continue to assess the exposure to loss based on further
developments in the FERC refund proceeding and will adjust the refund
obligation to reflect the impact of such developments in the periods in
which they occur.
During the three months ended March 31, 2003 and 2004, we adjusted our
estimated refund obligation and credit reserve (netted in revenues) and interest
income (recorded in interest income) related to energy sales in California as
follows (income (loss)):
THREE MONTHS ENDED MARCH 31,
------------ ------------
2003 2004
------------ ------------
(IN MILLIONS)
Estimated refund obligation ............................................ $ 87 $ -
Credit reserve ......................................................... (12) 21(1)
Interest receivable .................................................... 9 1
------------ ------------
Pre-tax impact on loss ............................................... $ 84 $ 22
============ ============
- ----------------------
(1) During the three months ended March 31, 2004, we reversed the credit
reserve, which was related to Pacific Gas and Electric Company (PG&E), a
purchaser of power in the Cal ISO and Cal PX markets in 2000 and 2001, due
to PG&E funding its obligations into an escrow account pursuant to a
bankruptcy order and its emergence from bankruptcy. As of March 31, 2004,
we believe that the gross accounts receivable are fully collectible,
subject to the refund obligation discussed above.
14
(12) LIBERTY GENERATING STATION
Default Under Non-Recourse Financing Agreement. Liberty Electric Power,
LLC (Liberty Power) is a wholly-owned subsidiary of Liberty Electric PA, LLC
(Liberty Electric), which is an indirect wholly-owned subsidiary of Orion Power
Holdings. Liberty Power and Liberty Electric are collectively referred to as
"Liberty." Liberty owns a 530 megawatt combined cycle gas fired power generation
facility (the Liberty generating station). Liberty financed the construction
costs of the Liberty generating station with borrowings under a credit agreement
of which $262 million (in principal) is outstanding as of March 31, 2004.
Borrowings under the credit agreement, which are non-recourse to Reliant Energy
and its affiliates (other than Liberty), are secured solely by the assets of the
Liberty generating station and by the ownership interest in Liberty. For
additional information, see notes 9(a) and 15(c) to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2003.
As of May 3, 2004, Liberty is in default under its credit agreement,
including its obligation to make $6 million in principal payments and $14
million in interest payments. We have classified the debt as a current
liability.
We do not intend to make additional capital contributions to Liberty and
have initiated discussions with Liberty's lenders regarding a possible
arrangement that would result in a transfer of ownership of Liberty to the
lenders or foreclosure. Although, to date, Liberty's lenders have not foreclosed
on their security interests in Liberty's assets or in the ownership of Liberty,
we would not expect the lenders to continue to refrain from exercising such
rights indefinitely.
Liberty's defaults under its credit agreement do not constitute an event
of default under any other debt agreement of Reliant Energy or its affiliates.
In addition, the exercise of the lenders foreclosure remedies with respect to
Liberty, or the transfer of ownership of Liberty to the lenders, would not
constitute an event of default under any of these debt agreements.
At December 31, 2003 and March 31, 2004, we evaluated the Liberty
generating station and its related intangible asset for impairment. Based on our
analyses, there were no impairments at that time. However, if the lenders
exercise their default remedies and/or we enter into a transfer arrangement, we
will incur a pre-tax loss of an amount up to our recorded net book value,
including the non-recourse debt obligations, with the potential of an additional
loss due to an impairment of goodwill allocable to Liberty. As of March 31,
2004, the consolidated net book value of Liberty Electric was $342 million,
excluding the non-recourse debt obligations of $262 million, resulting in a net
amount of $80 million.
Tolling Agreement Litigation. In July 2003, NEGT Energy Trading-Power,
L.P. (ET Power), the counterparty to the tolling agreement under which Liberty
sold the generation output of the Liberty generating station, filed for
bankruptcy. In connection with the bankruptcy proceeding, ET Power terminated
the tolling agreement. National Energy & Gas Transmission, Inc. (NEGT), which is
a debtor in the bankruptcy proceeding, and Gas Transmission Northwest
Corporation (GTN), which is not a debtor in the bankruptcy proceeding, have each
guaranteed ET Power's obligations under the tolling agreement. The liability of
each guarantor is capped at $140 million and the combined liability of the
guarantors is also capped at $140 million. Following the termination of the
tolling agreement, Liberty submitted a termination invoice to ET Power of $177
million.
In September 2003, Liberty sued GTN in federal court in Texas seeking
payment of $140 million (the maximum amount of its guarantee) out of the $177
million termination claim. Subsequently, ET Power countersued Liberty in
bankruptcy court seeking to collect a $108 million termination payment under the
tolling agreement. Liberty's obligations under the tolling agreement are secured
by a $35 million letter of credit issued under the senior secured revolver of
Reliant Energy. If the letter of credit were to be drawn, Reliant Energy would
be required to reimburse the issuing bank and may have an unsecured claim for
reimbursement against Liberty.
In April 2004, the parties commenced arbitration proceedings over the
disputed termination payment. Liberty submitted its arbitration claim for $159
million plus costs, fees and interest. Pending the conclusion of the
arbitration, Liberty has agreed to stay its litigation against GTN. We are not
able to predict the ultimate outcome of the arbitration and related litigation.
If, however, Liberty recovers the termination amount, the credit agreement
15
requires that such amounts be used to pay down principal and interest under the
Liberty credit agreement. Under United States and Pennsylvania tax laws, the
receipt of a termination payment by Liberty will likely be deemed taxable income
to Reliant Energy and its other affiliates even though the proceeds are required
to pay down debt to the lenders.
(13) RECEIVABLES FACILITY
We have a receivables facility arrangement with financial institutions to
sell an undivided interest in certain of our accounts receivable from our retail
business under which the financial institutions can invest a maximum of $350
million for their interests in eligible receivables. This transaction is
accounted for as a sale of receivables and, as a result, the related receivables
are excluded from our consolidated balance sheets.
The following table details the outstanding receivables that have been
sold and the corresponding notes receivable from the Qualified Special Purpose
Entity (QSPE), which have been reflected in our consolidated balance sheets:
DECEMBER 31, 2003 MARCH 31, 2004
----------------- -----------------
(IN MILLIONS)
Accounts receivable sold ............................................... $ 528 $ 467
Notes receivable from QSPE ............................................. (394) (289)
Equity contributed to QSPE ............................................. (16) (14)
----------------- -----------------
Funding outstanding .................................................. $ 118 $ 164
================= =================
We service the receivables and receive a fee of 0.5% and 0.4% of cash
collected for the three months ended March 31, 2003 and 2004, respectively. The
following table details the servicing fee income and costs associated with the
sale of receivables:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2004
----------------- -----------------
(IN MILLIONS)
Servicing fee income ................................................... $ 3 $ 5
Interest income ........................................................ 2 3
Loss on sale of receivables ............................................ (4) (9)
----------------- -----------------
Net .................................................................. $ 1 $ (1)
================= =================
The amount of funding available to us under the receivables facility
fluctuates based on the amount of eligible receivables available and by the
performance of the receivables portfolio. The following table details the
maximum amount under the receivables facility and the amount of funding
outstanding as of each date indicated:
DECEMBER 31, 2003 MARCH 31, 2004
----------------- -----------------
(IN MILLIONS)
Maximum amount under the receivables facility .......................... $ 350 $ 350
Funding outstanding .................................................... (118) (164)
----------------- -----------------
Unused and unavailable amount ........................................ $ 232 $ 186
================= =================
Prior to their sale, the book value of the accounts receivable is offset
by the amount of the allowance for doubtful accounts and customer security
deposits. In calculating the loss on sale for the three months ended March 31,
2003 and 2004, an average discount rate of 5.03% and 7.65%, respectively, was
applied to projected cash collections over a 6-month period. Our collection
experience indicates that we can expect 98% of the accounts receivable to be
collected within a 6-month period.
The receivables facility expires on September 28, 2004. If the receivables
facility is not renewed on its termination date, the collections from the
receivables purchased will repay the financial institutions' investment and no
new receivables will be purchased under the receivables facility.
16
(14) SUPPLEMENTAL GUARANTOR INFORMATION
For the two issuances of senior secured notes in July 2003 totaling $1.1
billion, our wholly-owned subsidiaries are either (a) full and unconditional
guarantors, jointly and severally, (b) limited guarantors or (c) non-guarantors.
The primary full and unconditional guarantors of these senior secured
notes are: Reliant Energy Aurora, LP; Reliant Energy Capital (Europe), Inc.
(RECE) (effective February 2004); Reliant Energy Choctaw County, LLC; Reliant
Energy Coolwater, Inc.; Reliant Energy Electric Solutions, LLC; Reliant Energy
Europe, Inc. (REE) (effective February 2004); Reliant Energy Northeast Holdings,
Inc.; Reliant Energy Ormond Beach, Inc.; Reliant Energy Power Generation, Inc.;
Reliant Energy Retail Holdings, LLC; Reliant Energy Retail Services, LLC;
Reliant Energy Services and Reliant Energy Solutions, LLC.
Orion Power Holdings is the only limited guarantor of these senior secured
notes and its guarantee of both the March 2003 credit facilities and the senior
secured notes is limited to approximately $1.1 billion.
The primary non-guarantors of these senior secured notes are: Astoria
Generating Company, LP; Erie Boulevard Hydropower, LP; Liberty Electric; Liberty
Power; Orion Power Capital, LLC (Orion Capital); Orion MidWest; Orion Power
MidWest LP, LLC; Orion NY; Orion Power New York LP, LLC; Reliant Energy
Channelview, L.P. (Channelview); Reliant Energy Trading & Marketing, B.V. (sold
in December 2003); Reliant Energy Mid-Atlantic Power Holdings, LLC and its
subsidiaries (REMA); Reliant Energy New Jersey Holdings, LLC; Reliant Energy
Power Generation Benelux, N.V. (sold in December 2003) and Reliant Energy Europe
B.V. (sold in December 2003). All subsidiaries of Orion Power Holdings are
non-guarantors. Effective February 2004, after the sale of our European energy
operations, the following entities formerly classified as non-guarantors, became
full and unconditional guarantors: RECE and REE. No adjustments to the
disclosures for 2003 were made for this change. The change has been made
prospectively beginning in 2004.
Each of Astoria Generating Company, L.P., Carr Street Generating Station,
LP, Erie Boulevard Hydropower, LP, Orion Capital, Orion MidWest, Orion Power
MidWest LP, LLC, Orion Power MidWest GP, Inc., Orion NY, Orion Power New York
LP, LLC, Orion Power New York GP, Inc. and Twelvepole Creek, LLC is a separate
legal entity and has its own assets.
17
The following condensed consolidating financial information presents
supplemental information as of December 31, 2003 and March 31, 2004 and for the
three months ended March 31, 2003 and 2004:
Condensed Consolidating Statements of Operations.
THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------
ORION POWER
RELIANT ENERGY GUARANTORS HOLDINGS
-------------- ---------- -----------
(IN MILLIONS)
Revenues ......................................... $ - $ 2,153 $ -
Trading margins .................................. - (83) -
-------------- ---------- -----------
Total .......................................... - 2,070 -
-------------- ---------- -----------
Fuel and cost of gas sold ........................ - 197 -
Purchased power .................................. - 1,708 -
Accrual for payment to CenterPoint
Energy, Inc. ................................... - 47 -
Operation and maintenance ........................ - 88 -
General and administrative ....................... 2 67 -
Depreciation and amortization .................... 5 31 -
-------------- ---------- -----------
Total .......................................... 7 2,138 -
-------------- ---------- -----------
Operating (loss) income .......................... (7) (68) -
-------------- ---------- -----------
Gains from investments, net ...................... - 1 -
Loss of equity investments ....................... - (1) -
(Loss) income of equity investments of
consolidated subsidiaries ...................... (436) (379) 17
Loss on sale of receivables ...................... - (4) -
Other, net ....................................... - - -
Interest expense
(53) (1) (10)
Interest income .................................. 1 12 -
Interest income (expense) - affiliated
companies, net
41 (12) -
-------------- ---------- -----------
Total other (expense) income ................... (447) (384) 7
-------------- ---------- -----------
(Loss) income from continuing operations ......... (454) (452) 7
before income taxes
Income tax (benefit) expense ..................... (3) (24) (3)
-------------- ---------- -----------
(Loss) income from continuing operations ......... (451) (428) 10
-------------- ---------- -----------
(Loss) income from discontinued operations ....... (1) 38 -
before income taxes
Income tax expense ............................... - 13 -
-------------- ---------- -----------
(Loss) income from discontinued operations ....... (1) 25 -
-------------- ---------- -----------
(Loss) income before cumulative effect of ........ (452) (403) 10
accounting changes
Cumulative effect of accounting
changes, net of tax ............................ - (43) -
-------------- ---------- -----------
Net (loss) income ................................ $ (452) $ (446) $ 10
============== ========== ===========
THREE MONTHS ENDED MARCH 31, 2003
--------------------------------------------
NON-
GUARANTORS ADJUSTMENTS(1) CONSOLIDATED
---------- -------------- --------------
(IN MILLIONS)
Revenues ......................................... $ 566 $ (178) $ 2,541
Trading margins .................................. - - (83)
---------- -------------- --------------
Total .......................................... 566 (178) 2,458
---------- -------------- --------------
Fuel and cost of gas sold ........................ 253 (105) 345
Purchased power .................................. 12 (73) 1,647
Accrual for payment to CenterPoint
Energy, Inc. ................................... - - 47
Operation and maintenance ........................ 137 - 225
General and administrative ....................... 26 - 95
Depreciation and amortization .................... 52 - 88
---------- -------------- --------------
Total .......................................... 480 (178) 2,447
---------- -------------- --------------
Operating (loss) income .......................... 86 - 11
---------- -------------- --------------
Gains from investments, net ...................... - - 1
Loss of equity investments ....................... - - (1)
(Loss) income of equity investments of
consolidated subsidiaries ...................... - 798 -
Loss on sale of receivables ...................... - - (4)
Other, net ....................................... 1 - 1
Interest expense
(33) - (97)
Interest income .................................. 1 - 14
Interest income (expense) - affiliated
companies, net
(29) - -
---------- -------------- --------------
Total other (expense) income ................... (60) 798 (86)
---------- -------------- --------------
(Loss) income from continuing operations ......... 26 798 (75)
before income taxes
Income tax (benefit) expense ..................... 7 - (23)
---------- -------------- --------------
(Loss) income from continuing operations ......... 19 798 (52)
---------- -------------- --------------
(Loss) income from discontinued operations ....... (397) - (360)
before income taxes
Income tax expense ............................... 2 - 15
---------- -------------- --------------
(Loss) income from discontinued operations ....... (399) - (375)
---------- -------------- --------------
(Loss) income before cumulative effect of ........ (380) 798 (427)
accounting changes
Cumulative effect of accounting
changes, net of tax ............................ 18 - (25)
---------- -------------- --------------
Net (loss) income ................................ $ (362) $ 798 $ (452)
========== ============== ==============
18
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------------
RELIANT ORION POWER NON-
ENERGY GUARANTORS HOLDINGS GUARANTORS ADJUSTMENTS(1) CONSOLIDATED
------- ---------- ----------- ---------- -------------- ------------
(IN MILLIONS)
Revenues...................................... $ - $ 1,414 $ - $ 573 $ (254) $ 1,733
Trading margins............................... - 6 - (3) - 3
------- ---------- ----------- ---------- -------------- ------------
Total....................................... - 1,420 - 570 (254) 1,736
------- ---------- ----------- ---------- -------------- ------------
Fuel and cost of gas sold..................... - 106 - 247 (103) 250
Purchased power............................... - 1,093 - 57 (151) 999
Accrual for payment to CenterPoint Energy,
Inc. - 2 - - - 2
Operation and maintenance..................... - 101 - 149 - 250
General and administrative.................... - 52 - 28 - 80
Depreciation and amortization................. - 47 - 71 - 118
------- ---------- ----------- ---------- -------------- ------------
Total....................................... - 1,401 - 552 (254) 1,699
------- ---------- ----------- ---------- -------------- ------------
Operating income.............................. - 19 - 18 - 37
------- ---------- ----------- ---------- -------------- ------------
Loss of equity investments.................... - (1) - - - (1)
(Loss) income of equity investments of
consolidated subsidiaries................... (10) (16) 3 - 23 -
Loss on sale of receivables................... - (9) - - - (9)
Other, net.................................... - - - 6 - 6
Interest expense............................. (71) (8) (11) (33) 13 (110)
Interest income............................... - 4 - 1 - 5
Interest income (expense)- affiliated
companies, net.............................. 31 (2) - (16) (13) -
------- ---------- ----------- ---------- -------------- ------------
Total other expense......................... (50) (32) (8) (42) 23 (109)
------- ---------- ----------- ---------- -------------- ------------
Loss from continuing operations before income
income taxes................................ (50) (13) (8) (24) 23 (72)
Income tax benefit............................ (12) - (4) (11) - (27)
------- ---------- ----------- ---------- -------------- ------------
Loss from continuing operations............... (38) (13) (4) (13) 23 (45)
------- ---------- ----------- ---------- -------------- ------------
Income from discontinued operations........... - - - - - -
------- ---------- ----------- ---------- -------------- ------------
Loss before cumulative effect of accounting
change...................................... (38) (13) (4) (13) 23 (45)
Cumulative effect of accounting change, net
of tax...................................... - 7 - - - 7
------- ---------- ----------- ---------- -------------- ------------
Net loss...................................... $ (38) $ (6) (4) (13) $ 23 $ (38)
======= ========== =========== ========== ============== ============
- -------------
(1) These amounts relate to either (a) eliminations and adjustments recorded in
the normal consolidation process or (b) reclassifications recorded due to
differences in classifications at the subsidiary levels compared to the
consolidated level.
19
Condensed Consolidating Balance Sheets.
DECEMBER 31, 2003
-------------------------------------------------------------------------------
RELIANT ORION POWER NON-
ENERGY GUARANTORS HOLDINGS GUARANTORS ADJUSTMENTS(1) CONSOLIDATED
------- ---------- ----------- ---------- -------------- ------------
(IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 23 $ 64 $ 10 $ 50 $ - $ 147
Restricted cash............................... 7 - 23 221 - 251
Accounts and notes receivable, principally
customer, net................................. 83 933 22 157 - 1,195
Accounts and notes receivable - affiliated
companies..................................... 421 546 - 257 (1,224) -
Inventory..................................... - 109 - 160 - 269
Trading and derivative assets................. - 372 - 121 - 493
Other current assets.......................... 8 218 3 105 - 334
------- ---------- ----------- ---------- -------------- ------------
Total current assets...................... 542 2,242 58 1,071 (1,224) 2,689
------- ---------- ----------- ---------- -------------- ------------
Property, plant and equipment, gross............ - 3,943 1 5,307 - 9,251
Accumulated depreciation........................ - (348) - (376) - (724)
------- ---------- ----------- ---------- -------------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET.............. - 3,595 1 4,931 - 8,527
------- ---------- ----------- ---------- -------------- ------------
OTHER ASSETS:
Goodwill, net................................. - 84 - 399 - 483
Other intangibles, net........................ - 127 - 592 - 719
Notes receivable - affiliated companies....... 1,960 685 - 44 (2,689) -
Equity investments............................ - 95 - - - 95
Equity investments in consolidated
subsidiaries.................................... 5,178 275 2,821 - (8,274) -
Trading and deriv